Duncan’s Economic Blog

Child Benefit Cuts: A Reader

Posted in Uncategorized by duncanseconomicblog on October 5, 2010

As the argument around means testing child benefit heats up, I’d recommend a quick read of the following.

The National Archives have an excellent quick history of Child Benefit. Previous attempts at reform have not been especially popular.

A good example would be 1957:

In 1957, the Chancellor, Peter Thorneycroft, proposed cuts in public expenditure including family allowances. He argued that in removing the allowance for a second child, more money would be available for larger families where nutritional problems were more severe. Boyd-Carpenter effectively presented counter arguments. Thorneycroft resigned after the Prime Minister, Harold Macmillan, vetoed his proposals.

As ever, the IFS have put out a superb and impartial analysis.

A third implication, and the most serious from an economic point of view, is that this reform seriously distorts incentives for some families with children. In particular, adults with children whose income places them below the higher-rate income tax threshold might be find themselves considerably worse off from a small rise in income. This is because such a family would effectively lose all their child benefit as soon as the adult’s income rose just above the higher-rate income tax threshold.

A family with two children currently receives £1,750 a year in child benefit, so a one-earner couple with two children with a gross income between £43,876 and £46,850 would be worse off than if their income were £43,875. Equivalently, a one-earner couple with an income of £43,875 would need a pay rise of £2,975 or more to ensure they were no worse off after paying income tax and national insurance and losing child benefit.

Nicola Smith has an excellent article on Left Foot Forward defending the notion of universal payments.

Today’s announcement is extremely bad news for working families – both those who will no longer receive Child Benefit and those who will now inevitably see the value of their benefits and Tax Credits fall in the future as the principle of universal welfare in the UK is further eroded.

Finally Cathy Newman assesses the politics of all this.

This is going to be politically painful. Ministers are pretty gobsmacked by the chancellor’s announcement, and they fear a backlash. It might not sound like big numbers in the scheme of things but this is a cut which  will affect very vocal middle England voters. Mumsnet is also on the warpath. I’m off to a reception hosted by them now. David Cameron and George Osborne are invited – will they dare to turn up? I’ll report back.

13 Responses

Subscribe to comments with RSS.

  1. Liam Murray said, on October 5, 2010 at 10:43 am

    Given the variety of family circumstances and the range of benefits available you’ll always find individual cases that seem to offend natural justice. That applied under Labour’s tax credit regime too so I find the synthetic anger a little too much to take. Any household with at least one higher rate taxpayer – even with several children – is reasonably well off compared to the national average so under the circumstances the withdrawal of CB seems a reasonable step whatever the ‘ah but’ scenarios people present.

    I actually think the strongest argument against the cut is the one about universality itself – social cohesion, middle-class support & buy in etc. It’s a shame the opposition seems to be built on these rare individual scenarios.

    Quick disclaimer: my wife doesn’t work by choice & stays at home with our 4yr old & I’m in the higher-rate bracket (just) so we fall into the supposed ‘outraged’ category. I need the money far, far less than many others hence my support for the move.

    • duncanseconomicblog said, on October 5, 2010 at 10:50 am

      Liam,

      Thanks for the comment.

      For what it’s worth – agree that the universality principle is the strongest reason to object.

      On the other hand, I’ve seen an estimate that whilst 1.2mn households lose the CB, another 900,000 with a combined income in the top rate keep it. So this is potentially very messy indeed.

      Will you be following the IFS advice and asking work for a pay cut?😉

      It’s hard for Labour to respond to this properly until we know the full details of what Osborne is cutting and what he is not. Two weeks to go.

  2. Liam Murray said, on October 5, 2010 at 11:15 am

    I am actually looking into the detail because I only just clear it – and not sure even then because I get a car component etc. and don’t know how it actually works so yes, losing a few hunderd £’s might let me keep the c.£1k we get in CB for Joseph.

    There was some light-hearted comment yesterday about Ed M’s silence & only Yvette offering some opposition on the airwaves. As a former Labour voter who supports the CB cut I think the relative silence is quite smart. When that coordinated response emerges (post the 20th obviously) it may be politically smarter to accept the CB change ‘with reservations & regret’ and ‘go after’ the far more material cuts likely to emerge at that point. That would seem a more mature response to me….

  3. stephen said, on October 5, 2010 at 11:55 am

    Liam

    I too have no problem with the better off being asked to contribute more so as to reduce the deficit (providing that the timing is right), however surely there has to be fairness among the better off as to how the extra revenue is raised. What amounts to a poll tax based on the number of children doesn’t strike me as being particularly fair. Wouldn’t it have been fairer to reduce the state pension and the additional personal allowance for pensioners paying the higher tax rate – who by their nature have less dependents and more assets to fall back on? Perhaps even fairer would have been to use income tax – which is rather better at taxing according to the ability to pay than most other taxes.

    There is also the little problem that the change has little democratic legitimacy given what was said during the recent election.

    • Liam Murray said, on October 5, 2010 at 12:38 pm

      Stephen,

      Your phrase “there has to be fairness among the better off” shows how problematic a topic this is. How do you define that group, where are the boundaries, how is ‘fairness’ addressed among other groups like the poor or the high earners, what if ‘fairness’ among one group undermines ‘fairness’ in another etc.

      My point holds that governments of any stripe can’t possibly address these individual scenarios – under any system possible there will be anomalies and injustice so advocates of solution A will highlight the anomalies under solution B and visa versa. All we can ask is that the broad principles of fairness and equity are observed and I think this change meets that criteria.

      • stephen said, on October 5, 2010 at 1:46 pm

        Liam

        Of course fairness and equity are in the eye of the beholder – and you are entitled to you opinion as to whether the current proposals are fair or otherwise (just as much as I am entitled to differ).

        However, if we want to base our view as to what is fair and equitable based on what the consensus of society actaully believes – I supect that there may well be a consensus around the view that children are a public good and that those who have them should pay less tax than those who don’t, irrespective of whether they are higher rate tax payers or not. I supect the same view would apply with regard to OAPs. The changes mean that the former will no longer apply. The fact that no party made this proposal to the electorate in the past, or that child benefit was upgraded when the child tax allowance was withdrawn would also point to their being general support in society for my view. I do take your point that no tax system can iron out all the wrinkles – but I think that the problem is deeper than that in this case.

  4. Peter Kunzmann said, on October 5, 2010 at 12:25 pm

    It’s also worth noting that at the Liberal Democrat conference a couple of weeks ago, a motion was passed (near unanimously) which pledged to keep Child Benefit universal.

    • stephen said, on October 5, 2010 at 1:50 pm

      Also worth noting that Nick Clegg said nothng on the matter, although he must have been aware of what was proposed. I’m afraid it looks that Clegg now has form for such duplicitous behaviour given his acknowledgement after the election that he he did not agree with his Party’s own policy on reducing the deficit during the election.

      Given that I supect that the main losers from the Child Benefit proposals are likely to be a key LibDem demographic tehre may be some justice.

  5. Alex said, on October 5, 2010 at 1:39 pm

    There’s also the competence issue, to be brutal about it. This is one of the very first policy issues they have tackled in any detail and they’ve dropped the ball.

    I’m actually much more offended by the bennies cap, which seems to be pure policy-by-vaguely remembered headline, with a side order of Shirley Porterism…

  6. Cian said, on October 5, 2010 at 1:39 pm

    The government could have just as easily raised the money by raising taxes on the higher rate. This would be more efficient (the systems are already in place to do this – whereas its not going to administratively simple to manage this), wouldn’t have created a tax trap (which if nothing else is politically very stupid) and would not have been seen as either anti-family, or anti-women. Which this probably will be. I think it would also have unarguably been fair. And now if they try to make this tax fairer, that will increase the administrative costs, the complexity, etc.

    I suspect that economically this is also probably quite stupid. My guess would be that families probably spend more money, than comparable households without children. So if you wanted to create a reverse stimulus, this might be quite a good way of doing so.

    • stephen said, on October 5, 2010 at 1:53 pm

      I suspect introducing a 45% tax band at around £100,000 would have raised much more – and would have also reduced the current 61% marginal rate that applies at that level, and so removed a disincentive rather than created one.

  7. pablopatito said, on October 5, 2010 at 3:42 pm

    Luckily it appears that a couple of years ago my employer gave up bothering with pay rises, otherwise I would have ended up in a position in 2013 where I would have had to ask them for a pay cut. That is surely an indication that this is a daft policy?

    I would have thought that a simple rule for benefits should be means test it if its cost effective, otherwise make it universal. But it seems they made it fairly arbitrary and justified the arbitrariness of it by saying no benefit cuts are ever fair.

  8. dannyboy said, on October 5, 2010 at 4:39 pm

    No-one on either side of the debate seems to mention the troubling issue of the increasing monetisation of the process of childbirth and population replacement.

    Children are undoubtedly a financial handicap for their family whether or not this is outweighed by the positive intangible benefits of having children.

    With the native population already having a fertility level well below replacement this issue should not be first and foremost about fairness, it is about preventing an italian style demographic implosion scenario coming to these shores in 30 years time.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: